I'm interested in learning the boundaries of wash sale rules beyond what is written in the Wiki. I am not actually worried about this switch, because the sale was in September and the purchase was in November. My instinct is that the answer would be 'no' because their holdings and return histories are so different.

Please don't dismiss the issue so quickly. The IRS publication is (seemingly deliberately) vague, as pointed out here:

"For example, in the case of index funds, don't switch out of one family's fund and into another that tracks the same index. You might argue that you're dealing with two different fund companies with two different expense ratios, but you may not prevail. The IRS has been rather vague in what it deems identical with regard to mutual funds, preferring to consider all the facts and circumstances of each case."

Given that (in other words, taking that concern as legitimate), my question is intended to understand where different people draw the line. (If you disagree with the concern expressed in that quote, then you're done. You draw the line sufficiently far away from my question that it is an easy matter for you.)

In other words, if you believe that switching out one family's index fund into another that tracks the same index does trigger the wash sale rule, then where do you draw the line between that and the JORAX-ARTGX situation, i.e., two funds that have the same objective?

This came up in a different forum this morning where someone implied that even switching from one managed fund to another managed fund with the "same objective" would trigger the wash sale rule. That seems ludicrous to me, but I really cannot put my finger on authoritative words that unequivocally refute it.

The following is a list of mutual fund transactions that are generally considered to be acceptable under the wash sale rules despite the lack of a concrete definition of "substantially identical security":

1. Sell one index fund and buy another index fund, if the indexes of the two funds are not the same index (e.g., S&P 500 for the Russell 1000). 2. Sell one actively managed fund and buy a fund at another company with different portfolio managers. 3. Sell an index fund and buy an actively managed fund regardless of the fund company. 4. Sell an actively managed fund and buy an index fund regardless of the fund company.

Johm221122 wrote:Just curious why did you buy this fund for taxable?why did you not hold Janus fund?

That's a bit of a tangent, so let's take that off to private messages if my reply here is not sufficient. I generally use Lipper Leader ratings, FundMojo assesments, as well as my own review of other aspects of funds to make such decisions. If you check out just the FundMojo pages for those two funds, you'll clearly see many, though not all, of the things that motivated my actions. Note, though, that they were independent actions. I sold JORAX because I felt it was inadequate, and then two months later, as part of rebalancing prompted by more of my financial educational process, added ARTGX.

1. The IRS doesn't know what "substantially identical" means either. At least they aren't confident enough to stand up in tax court and defend a position.

2. By and large, the people doing swaps of mutual funds are experienced investors and likely have carryover losses. As such, even if the IRS went after some exchange as a wash sale, it wouldn't amount to anything. There would be no extra tax due, so no penalty or interest or anything else to pay for the time spent. There are more profitable areas for them to pursue with their time and resources.

bUU wrote:Please don't dismiss the issue so quickly. The IRS publication is (seemingly deliberately) vague, as pointed out here:

"For example, in the case of index funds, don't switch out of one family's fund and into another that tracks the same index. You might argue that you're dealing with two different fund companies with two different expense ratios, but you may not prevail. The IRS has been rather vague in what it deems identical with regard to mutual funds, preferring to consider all the facts and circumstances of each case."

That's my personal rule. Two index funds tracking the same index (no matter how well they do it or how much they underlying bonus techniques like sampling stocks or using some futures), it's substantially equivalent. If they track different indexes (no matter how similar), it's not a wash. But yeah, who knows how the IRS would actually rule on this in an audit.

BBL wrote:The following is a list of mutual fund transactions that are generally considered to be acceptable under the wash sale rules despite the lack of a concrete definition of "substantially identical security":

1. Sell one index fund and buy another index fund, if the indexes of the two funds are not the same index (e.g., S&P 500 for the Russell 1000). 2. Sell one actively managed fund and buy a fund at another company with different portfolio managers. 3. Sell an index fund and buy an actively managed fund regardless of the fund company. 4. Sell an actively managed fund and buy an index fund regardless of the fund company.

OP, that's the list. There is nothing clearer from the IRS. From my faulty memory here, no one following above list has reported wash sale issues with the IRS. (Seem to remember this topic being heavily discussed in 2007---this forum's founding and before the Wiki was created. Above list was deemed to be the guiding principles to avoid a wash sale. )

bUU wrote:...My instinct is that the answer would be 'no' because their holdings and return histories are so different.

Holdings and return histories are not good measures for determining wash sales.

VTSMX (Total Stock Market Index) and VIVAX (Large Cap Value Index) have similar holdings and return histories, yet follow different indexes. It is for this reason (similar holdings/returns) it is advantageous for us to TLH between them and maintain our portfolio balance. It is the different indexes which avoid the wash sale.

VTSMX (100%, Total Stock Market Index) and VFINX (80%, S&P500 Index)/VEXMX (20%, Extended Market Index) have almost identical holdings and return histories, yet follow different indexes. It is for this reason (similar holdings/returns) it is advantageous for us to TLH among them and maintain our portfolio balance. It is the different indexes which avoid the wash sale.

There are a few things that people generally agree are "substantially identical".

-Different share classes of the same thing (mutual fund vs ETF version of the same thing, Investor shares vs Admiral shares).

-Preferred stock vs common stock from the same company.

Beyond that, nobody really knows although opinions are many and discussions are almost constant during tax loss harvest times.

The IRS has stated something like "in general, one mutual fund is not substantially identical to another mutual fund" (some IRS Pub I looked at in the past). There is some thought that MIGHT not apply to 2 index funds that follow the same index (note I didn't say similar index). But even in that case, there is an argument that those are not "substantially identical" because ownership, shareholders, managers, and boards of directors are not the same and that that is what "substantially identical" is all about (some case law from awhile back which may or may not have been replaced with new case law).

There's a lot of ground to be covered between those 2 extremes and there is no "bright line" to depend on. Until the IRS gives some guidance, I doubt you will ever know more than that. Yes, it's true you probably know as much as most folks. You'll just have to figure out what you are comfortable with and proceed accordingly.

About your example, I'd be very surprised if anyone here would consider those two funds anywhere near a wash sale. Not even close.

My position would be if you get a letter from the IRS saying that your sale was declared a wash sale because you bought a substantially identical replacement, then the replacement was (probably) substantially identical. If you don't get a letter, it wasn't substantially identical. It's not your job to consult psychics and palm readers to try to discern the past intent of some dead IRS dude. Let him rest in peace.

dratkinson wrote:OP, that's the list. There is nothing clearer from the IRS. From my faulty memory here, no one following above list has reported wash sale issues with the IRS.

Of course, that's not definitive. Here's a secret I can tell now that the statute of limitations has passed. In 2008, when I was still new at all this, it didn't occur to me that dividend reinvestments in one account could wash part of a tax-loss I was harvesting in a different account. Later I realized that had happened. I did not file an amended return. The IRS did not seem to notice.

I will say again, people spend an inordinate amount of time worrying about wash sales. Now that I have tons of carryover losses, I'll be as aggressive as I want. If they declare a wash on some funds, I will shrug and note the new basis for those shares.

retiredjg wrote:The IRS has stated something like "in general, one mutual fund is not substantially identical to another mutual fund" (some IRS Pub I looked at in the past). There is some thought that MIGHT not apply to 2 index funds that follow the same index (note I didn't say similar index). But even in that case, there is an argument that those are not "substantially identical" because ownership, shareholders, managers, and boards of directors are not the same and that that is what "substantially identical" is all about (some case law from awhile back which may or may not have been replaced with new case law).

While I don't believe there are any rulings from the Tax Court on wash sales and mutual funds, there are enough other wash sale rulings that one can figure out how reasonable people (the judges and attorneys) apply the "susbantially identical" criteria to financial instruments. They have ruled on what kinds of issues are important and what issues are form (not substance). They have ruled on how significant the differences must be to meet the criteria (slight differences in maturity of two bonds are not significant enough, for example).

We can always punt on this issue by saying a) there are no mutual fund rulings, or b) nobody has been audited on this issue. But we certainly have enough to make an informed reasoned decision on how two mutual funds would be viewed as far as the wash rule issue.

Wagnerjb wrote:But we certainly have enough to make an informed reasoned decision on how two mutual funds would be viewed as far as the wash rule issue.

If that is true, then what is it that we have to make these decisions?

This is not meant to be a smarta$$ question. I don't know what you think we have to make an informed reasoned decision. If we knew that, why does this subject come up again and again with no apparent conclusion? The way I see it, all we have are a lot of widely differing opinions.

retiredjg wrote:If that is true, then what is it that we have to make these decisions?

This is not meant to be a smarta$$ question. I don't know what you think we have to make an informed reasoned decision. If we knew that, why does this subject come up again and again with no apparent conclusion? The way I see it, all we have are a lot of widely differing opinions.

In a recent thread on wash sales, I gave several concrete examples that add to our understanding of how the Tax Courts interpret the issue of whether two investments are "substantially identical".

Substantially identical securities. Two issues of U.S. Treasury 2 1/4 percent bonds which differ slightly only as to first call, maturity andinterest payment dates, are substantially identical securities within the meaning of the wash sales provisions. Consequently, loss sustained upon sale of bonds of one issue followed by purchase of the other within the 61-day period will not be allowed. §§39.118–1, 1.1091–1. (Sec. 118, ’39 Code; Sec. 1091, ’86 Code.) Rev. Rul. 58-211, 1958-1 C.B. 529.

Substantially identical--bondsAn important case for determining whether two bonds are substantially identical is Hanlin.

In its decision, the court stated that substantially identical means "something less than precise correspondence will suffice to make the transaction a wash sale." The court also noted the legislative history of the wash-sale rules does not define the "something less." The court concluded that a "change in [economic] position" is the determining factor in deciding if the loss is "fictitious" and, therefore, disallowed under the wash-sale rules. Basically, if two investments have different characteristics that would affect the investment decision of an investor, the investments would not be considered substantially identical.

Futures Contracts. GCM 38369 (referenced in 39551) says that treasury futures are considered “substantially identical” to treasuries for the purpose of 1091.

These are real life examples of how the court has ruled on other investments, and they also provide their logic and reasoning. Not everybody is capable of discerning the difference between form and substance, and for those people the "rules of thumb" offered by practicioners is very adequate. But for those who are interested in - and capable of - learning how to make their own decision, we certainly have some examples to put color into this issue.

Brian: I certainly respect your right to interpret the wash sale rule differently than I do; however in this thread I am just highlighting that we have actual court cases that help us determine how to understand what "substantially identical" means. One can draw a different conclusion about how to apply the rule to specific mutual funds, where we have no actual rulings. But I don't think you can say we have nothing to base our opinions on.

Wagnerjb wrote:Brian: I certainly respect your right to interpret the wash sale rule differently than I do; however in this thread I am just highlighting that we have actual court cases that help us determine how to understand what "substantially identical" means. One can draw a different conclusion about how to apply the rule to specific mutual funds, where we have no actual rulings. But I don't think you can say we have nothing to base our opinions on.

Wagnerjb wrote:In a recent thread on wash sales, I gave several concrete examples that add to our understanding of how the Tax Courts interpret the issue of whether two investments are "substantially identical".

Thanks for the info, Andy. I had not followed that thread. I don't think it gives much guidance for mutual funds though. It's still uncharted territory.

But I have to agree that an inordinate amount of worry is wasted on this issue. There's no need to walk on the edge when there are usually plenty of other choices that will get the job done.